A self-certification mortgage is a home loan product designed for borrowers who may not be able to prove their income through traditional means such as tax records and pay slips. They were first made available to self employed individuals who could not produce the documentation required for a standard mortgage product from a high street lender.
If you are self employed then a self-certification mortgage may be the most appropriate home loan product for you to apply for if you are buying a property. Lenders rarely need the applicant to produce evidence of a forensic nature in order to verify their income. Instead, lenders will normally require the applicant to complete a statutory declaration regarding the sources and levels of their various income streams.
Such income need not be from self employment activity in the traditional sense. The income could be derived from businesses or investments rather than physical labour or traditional work activities performed under a self employment structure. A self-certification mortgage may therefore also be an appropriate product for a business owner or an individual who is not employed but earns a healthy income from their investments.
In recent times many employed individuals also applied for self-certification products when buying or refinancing their homes. Such an activity has become common as many employees now receive all or part of their income by way of commissions and bonuses. Such forms of income can be unstable and not appropriate for standard high street mortgage applications regardless of how high the level of income may be. A self-certification mortgage can therefore be an appropriate product for an employee with an unsteady level of income.
While self-certs can be a blessing for people who have trouble proving their income they should not be abused. Some people take advantage of the lack of evidence required to obtain such a home loan and exaggerate their income in order to secure a bigger mortgage. While this may help such applicants buy a larger property it also carries financial risks and could be illegal.
Aside from the fact that exaggerating your income on a mortgage application is a fraudulent activity that could be punishable with jail time, obtaining a bigger mortgage through deception carries financial risks. The most obvious risk is that a bigger mortgage will lead to higher monthly repayments which in turn reduced the safety margin for the mortgagor should interest rates rise. When an individual applies for a self-certification mortgage and lies about their income they may be setting themselves up for financial disaster if interest rates rise.
In basic terms - the applicant may be able to afford the repayments on the home loan at the time they acquired it but they may not be able to if interest rates rise. This will particularly be the case where the applicant obtained a larger mortgage than the lender believes their true level of income can support.
There is a variety of people for whom it may be appropriate to apply for a self-certification mortgage product. This includes the self-employed, business owners, investors, and employees with variable levels of income. No matter how an applicant obtains their income, however, it should never be exaggerated in order to obtain a bigger loan.
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